Fitch Affs Anchorage, AK's Water Revs at 'AA'; Outlook Stable
SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA' rating on the following Municipality of Anchorage, Alaska debt:
--$130.7 million water revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by a first lien on net water revenues before the utility's payment in lieu of taxes (PILOT).
KEY RATING DRIVERS
STRONG SERVICE AREA: The utility provides water services to 95% of Anchorage, the economic center of the state of Alaska. The municipality's economy is large and growing at a healthy pace, but it is subject to booms and busts due to the state's oil and gas industries.
ABUNDANT CLEAN WATER: The utility benefits from an ample supply of clean water, giving it capacity for future growth and insulating it from the supply pressures affecting utilities in other parts of the U.S.
SOUND FINANCES: Financial performance is healthy and very predictable because of the water system's fixed rate structure. Debt service coverage averaged a strong 2.2x over the past three years, while cash averaged an adequate 199 days.
SIGNIFICANT SUBORDINATE TRANSFER: The utility makes an annual payment in-lieu of taxes to the Municipality of Anchorage. While transfers are subordinate to debt service, they move excess cash flow out of the utility, forcing the water system to rely more heavily on borrowing for capital. All-in coverage after transfers averaged an adequate 1.5x over the past three years.
HIGH DEBT: Debt levels are roughly double the median for rated utilities and continue to rise, given the utility's plan to invest heavily in its aging infrastructure and practice of funding most capital spending through borrowing.
REGULATED RATES: The utility's rate flexibility is reduced by a cumbersome rate-setting process that requires approval from the Regulatory Commission of Alaska (RCA); however, recent rate cases have been uncontested, suggesting an easing in this pressure.
SENSITIVE TO DEBT, LIQUIDITY: The rating could come under downward pressure if financial metrics, particularly liquidity measures, deteriorate or the utility's debt burden increases beyond the levels currently forecast. The Stable Outlook suggests this is unlikely to occur over the next two years.
The utility is the monopoly provider of essential water services to about 95% of Anchorage with 55,400 accounts and an estimated service area population of about 284,000.
STRONG SERVICE AREA AND SUPPLY POSITION
Anchorage (general obligation bonds rated 'AA+' with a Stable Outlook by Fitch) is the economic center of Alaska with about 40% of the state's population. The municipality's economy produces about 55% of the state's economic output and outperformed the nation during the recent economic downturn. The economy remains concentrated in the oil and gas sector, somewhat offsetting strong recent performance due to the lack of breadth in the economic base. Median household income is solid at 143% of the national level and 109% of the state median. The unemployment rate is quite low by national standards, having averaged just 5% over the past 12 months.
The customer base is about two-thirds residential and growing gradually. Customer concentration is not a significant concern with the top 10 ratepayers providing just 5.7% of revenues.
One of the utility's key strengths is a large supply of clean water drawn from watersheds in the protected wilderness areas. The strong supply position insulates the utility from the water shortages that periodically reduce financial performance in more arid regions and allows a fixed fee structure that provides extraordinary revenue stability.
SOLID FINANCIAL PERFORMANCE
Financial performance and liquidity have been consistently sound over the years. Debt service coverage on the rated water revenue bonds, the utility's most senior debt, was very healthy at 2.8x in fiscal 2012. The utility makes a substantial annual payment to the Anchorage general fund that is subordinate to debt service. After the $7.4 million payment in lieu of taxes, coverage dropped to a still robust 2.1x. All-in coverage - which includes revenue bonds, subordinate state loans and the PILOT payments - was adequate at 1.5x in fiscal 2012.
From fiscal 2008-2011 the system averaged 253 days of operating expenses in unrestricted cash and investments. However, the fiscal 2012 audit showed a very weak 59 days due to a short-term loan to the municipality's sewer fund to provide interim construction financing while waiting for external loan proceeds. Liquidity would have been solid at 283 days cash without the sewer loan. The loan to the sewer fund has been repaid. Management does not expect the water utility to provide further short-term financing to the sewer enterprise, having secured a bank line of credit to support the sewer fund's interim financing needs going forward.
HIGH DEBT LEVELS
Debt per customer was $3,914 at the end of 2012 - more than double the median for 'AA' rated utilities. The elevated debt burden reflects significant investments to catch up on renewal of aging system infrastructure, the high cost of doing business in Alaska and the decision to transfer excess cash flows out of the utility instead of investing it back into the system.
The average age of the utility's plant is more than double the average for similarly rated utilities, suggesting continued significant capital needs. Debt is projected to rise to a very high $5,378 at the end of the 2014-18 capital improvement plan (CIP) which totals $162.6 million and is 80% debt financed (double the median use of debt among rated water and sewer utilities).
The utility's heavy reliance on debt and its large deferred maintenance needs are its most significant credit weaknesses, holding the rating at a lower level than would be suggested by the utility's strong financial performance, extremely stable revenue structure, strong service area and extraordinary water supply position.
REGULATED RATE SETTING
The utility's cumbersome rate-setting process also weighs on the rating somewhat, but less than it did in previous years when the municipality and the RCA were engaged in active rate disputes. Rate cases have been decided in a timely manner in recent years, and the RCA has approved rates as proposed. While the rate-setting environment appears to have improved, the municipality is judged to have less rate flexibility than the typical municipal water enterprise even though rates are low by national standards at just 0.7% of median household income.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria
2013 Outlook: Water and Sewer Sector
2013 Water and Sewer Medians
Posted: October 1, 2013